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Southern Union to Unite with ETE

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Southern Union Company has entered into a definite agreement with Energy Transfer Equity, L.P. (ETE - Snapshot Report) under which the latter has agreed to buy Southern Union for $7.9 billion, including $3.7 billion of existing debt.

Per the agreement terms, stockholders of Southern Union will exchange their common shares for newly issued Series B Units of ETE with a value of $33.00 per share, or approximately $4.2 billion. This represents approximately 17.0% premium to the closing price of Southern Union common stock as on June 15, 2011. The Series B Units will be registered and are expected to be listed for trading on the NYSE and will be entitled to an annualized distribution yield of not less than 8.25%, payable quarterly, based on the implied value of $33.00 per Series B Unit.

The transaction is expected to close in the first quarter of 2012, subject to Southern Union stockholder approval and regulatory approvals. No Southern Union unit holder approval is required for the closing of this transaction. The terms of the agreement has unanimously been approved by the boards of directors of both companies.

Post acquisition, Energy Transfer Equity will own attractive assets of Southern Unionalong with the assets owned and operated by its two master limited partnership (MLP) subsidiaries, Energy Transfer Partners, L.P. (ETP - Analyst Report) and Regency Energy Partners LP . Collectively, both Southern Union and Energy Transfer Equity will include more than 44,000 miles of natural gas pipelines and approximately 30.7 billion cubic feet per day of natural gas transportation capacity. This would make ETE one of the largest natural gas infrastructure players in the U.S.

Energy Transfer Equity currently owns 100% of the incentive distribution rights (IDRs) of ETP and approximately 50.2 million ETP limited partner units. It owns 100% of the IDRs of RGNC and approximately 26.3 million RGNC limited partner units. At closing, per the terms of the merger agreement, Southern Union will become a wholly owned subsidiary of ETE.

The transaction will be immediately accretive to ETE’s distributable cash flow and create significant organic growth opportunities in strategic geographic locations across the U.S. as well as offer potential affiliate joint ventures. Energy Transfer Equity will benefit by approximately $100 million in commercial and operational synergies and by an additional $25 million in one-time savings from the said transaction.

The amalgamation will create a diversified partnership that will be well positioned to serve its existing customers and compete for new ones. This transaction will likely result in multiple opportunities for ETP and RGNC and will further enhance value for all parties within the Energy Transfer group of companies.

Southern Union Company owns one of the largest interstate pipeline networks in the U.S. and one of the largest LNG import terminals in North America. Management’s focus on the regulated asset base will provide the company with low-risk growth. The company is also well positioned in the Permian Basin to focus on further natural gas midstream expansion programs.

However, valuation continues to be restricted by the company’s overt dependence on outside funds to sustain its expansion programs, as well as seasonality in its pipeline business and re-contracting uncertainty for its percent of proceed contracts. Thus, in the absence of further positive triggers, we feel the company is adequately valued, leaving little room for upside in the near term. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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